LEIPLINE Newsletter - February 2010

The Jacksonville Economy in the Fourth Quarter of 2009

Introduction


This is the thirteenth installment of the LEIPLINE.  Our focus each quarter is generally on the four variables for which we collect data and the implications of those data for the Jacksonville MSA overall.  Evidence at the aggregate level seems to suggest that the recession is over, or soon will be.  However, sub sectors of the economy are not close to recovery with the housing sector still extremely weak, unemployment near ten percent, and commercial real estate in dire circumstances.  Very recent data suggest that consumer confidence fell significantly in January, some retailers are still recording declining sales, and bank lending is at its lowest level since 1942.  We are relatively confident that the worst part of the 2007-2009 “Great Recession” is over, what we are not clear about is whether 2010 will reflect the early stages of the recovery, or the right side of the “W” of a double dip recession. 

The Macro Economy


The fourth quarter national numbers (shown below in the far right column and which are still preliminary) reflected a sizable uptick in most subcomponents of real GDP including personal consumption expenditures (PCE), gross private domestic investment, and net exports.   The increase in investment is particularly large and it represents 67% of the overall increase of 5.7%.  While this appears to be very positive, caution is warranted.  Most of the investment increase is inventory, which in the fourth quarter can reflect business confidence in future product demand, but it can also reflect unsold goods during the Christmas season.  If it is the latter, then the overall increase in real GDP is really suggestive of less than half as much. The PCE increase was reflective of the second quarter in a row of increased consumer purchases, with over half of those on services and another sizable portion associated with non-durable goods.  During a normal growth fourth quarter one would expect a more sizable increase in durable goods (those with life expectancies of greater than one year).  This evidence suggests that Christmas shoppers purchased less expensive, more immediately gratifying products this quarter.  The foreign sector outcomes reflected the low value of the dollar up until recently, with sizable increases in exports and almost as large declines in imports. 

 

 

Description

 2008
I

   2008   
II

   2008   
III

   2008   
IV

   2009   
I

   2009   
II

   2009   
III

   2009   
IV

Percent change at annual rate:  

 

 

 

 

 

 

 

 

      Gross domestic product  

-0.7  

1.5  

-2.7  

-5.4  

-6.4  

-0.7  

2.2  

5.7  

Percentage points at annual rates:  

 

 

 

 

 

 

 

 

Personal consumption expenditures  

-0.39  

0.06  

-2.49  

-2.15  

0.44  

-0.62  

1.96  

1.44  

   Goods

-1.24

-0.12

-1.89

-2.41

0.56

-0.71

1.59

0.61

      Durable goods

-0.75

-0.46

-0.95

-1.64

0.28

-0.41

1.36

-0.06

      Nondurable goods

-0.49

0.35

-0.94

-0.78

0.29

-0.29

0.23

0.67

   Services

0.85

0.17

-0.60

0.26

-0.13

0.09

0.37

0.83

Gross private domestic investment  

-1.20  

-1.66  

-1.04  

-3.91  

-8.98  

-3.10  

0.54  

3.82  

   Fixed investment

-0.99

-0.41

-1.30

-3.28

-6.62

-1.68

-0.15

0.43

      Nonresidential

0.25

0.19

-0.73

-2.47

-5.29

-1.01

-0.59

0.29

         Structures

0.27

0.56

0.00

-0.31

-2.28

-0.69

-0.68

-0.52

         Equipment and software

-0.02

-0.38

-0.73

-2.15

-3.01

-0.32

0.10

0.81

      Residential

-1.24

-0.60

-0.57

-0.81

-1.33

-0.67

0.43

0.14

   Change in private inventories

-0.21

-1.25

0.26

-0.64

-2.36

-1.42

0.69

3.39

Net exports of goods and services  

0.36  

2.35  

-0.10  

0.45  

2.64  

1.65  

-0.81  

0.50  

   Exports

-0.02

1.47

-0.48

-2.67

-3.95

-0.45

1.78

1.90

      Goods

0.34

1.17

-0.17

-2.50

-3.41

-0.45

1.58

1.90

      Services

-0.36

0.30

-0.31

-0.17

-0.54

0.00

0.20

0.00

   Imports

0.38

0.88

0.38

3.12

6.58

2.09

-2.59

-1.41

      Goods

0.46

0.67

0.55

3.09

6.25

1.89

-2.41

-1.55

      Services

-0.08

0.21

-0.17

0.03

0.34

0.21

-0.18

0.14

Government consumption expenditures
    and gross investment
 

0.51  

0.71  

0.95  

0.24  

-0.52  

1.33  

0.55  

-0.02  

   Federal

0.56

0.55

0.93

0.49

-0.33

0.85

0.62

0.02

      National defense

0.39

0.34

0.93

0.20

-0.27

0.70

0.45

-0.19

      Nondefense

0.17

0.21

0.00

0.29

-0.06

0.15

0.17

0.21

   State and local

-0.05

0.15

0.01

-0.25

-0.19

0.48

-0.08

-0.04

 

However, the historical norm for inflation over a long period going back to the early 1950s suggests closer to a 4% rate. Even the average for the last decade preceding 2009 was closer to 3%. With all of the potential money growth created by the Federal Reserve’s (FED) purchases of treasury and mortgage-backed securities, and the monetization of the debt (financing of federal government debt when the FED buys newly issued treasury securities) inflation would be much higher if banks were actually lending and consumers were buying. Given the relatively low inflation rates, there is also little reason to believe that the economy is strengthening rapidly. However, it is important to recognize that when the strengthening begins, the inflationary effects can and likely will be large and difficult to control.

The national unemployment rate fell below double digits in January (9.7%) after spending the entire fourth quarter at 10% or just above. However, these numbers need to be viewed cautiously as well. The dip to 9.7% would actual not have occurred if not for approximately 800,000 former members of the workforce who were relegated to the categories of discouraged workers because they were no longer looking for work, or had not looked in the last four weeks. The removal of these individuals from the workforce had a much smaller effect than removing them from the unemployed in the ratio that is the unemployment rate. In addition, an astute evaluator of unemployment should always consider not just the published unemployment rate, but also the other categories of unemployment that are published by the Bureau of Labor Statistics at www.bls.gov.

Interest rates have remained at extremely low levels, and the chairman of the FED announced yesterday that they are likely to remain there for several more months. This is an indicator that the FED is still worried more about weakness in the economy than inflationary strength. It is likely that even after the economy starts to grow in a sustainable way, mortgage rates will have to be kept artificially low in order to dispose of the glut in residential real estate. It is also likely that incentives will need to arise to promote the sale or leasing of the massive amount of commercial real estate that lays vacant.

The trade sector during the fourth quarter was advantageous to growth, but the sizable increase in the value of the dollar in recent weeks due to the financial crisis in Greece and the associated decline in the Euro will likely reduce US exports and re-stimulate imports. China’s role in international transactions and their unwillingness to allow their currency to appreciate will also promote this outcome.



What Does It All Mean?


Ultimately, while the GDP evidence suggests that we are on the road to recovery, prudence suggests that we be wary of how fast we recover and how bumpy it will be.  There is considerable weakness still remaining in various sectors and consumers are still spending at far smaller rates than prior to early 2008.  Government programs can attempt to mitigate weakness in the economy, but ultimately consumers are king, and right now they are not “eating cake” or bread either!  

The Local Data


Since many of the data change for at least one month after we first report them, we have decided to wait until at least the middle of the following quarter to report each quarter’s implications.  Since the local CPI is the most significant variable that we analyze, we will start with it. 

The 2009.4 Jacksonville CPI


Prices in the Jacksonville MSA through December were up for seven of the twelve quarters.  However, the fourth quarter inflation numbers advanced at a 4.36% annual clip.  Overall for 2009, the local inflation rate was 1.38%.  Automobile prices continued to drive the CPI, with the fourth quarter primarily reflecting sizable increases as automobile dealers took advantage of Cash for Clunkers early and incentives from manufacturers near the end of the quarter.  Food prices were only moderately higher.  Gasoline prices escalated beyond what is normal in the fourth quarter as the dollar weakened and oil prices rose.  Most other prices changed only moderately except for those related to fuel price increases and tax changes that drove costs for homeowners and renters up.  Housing prices were generally in a malaise and sales remained weak while rents stayed quite stationary. 

 

The outlook for the first quarter of 2010 relative to inflation very much depends on how fast Jacksonville consumers regain the confidence to spend.  The early sales data for the Valentine’s holiday were positive, although primarily reflecting purchases of small priced items.  If consumers regain their drive based on greater confidence in the stability of their employment and prospects for wage gains in the near future, price increases will likely arise, although moderately.  What both the local and national economies need are revolutionary new products that become “must-haves,” like DVD players, Iphones, or perhaps new home furnishings.  This process will stimulate the economy, and the evidence of their impact will be felt in price increases closer to historical norms.  Right now, these occurrences are not on the horizon, so we anticipate that inflation during the first quarter will be moderate – averaging between two and three percent on an annualized basis.  



Unemployment


Unemployment rates in Jacksonville during 2009.4 continued their rise to above the 11% level by December.  This trend is very disconcerting because at least the base national numbers have started down while the Jacksonville MSA unemployment has trended ever upward.  It has now been five straight months that local unemployment has exceeded the national average.  Despite job losses, and an increasingly bleak picture in the state of Florida; our local labor force keeps increasing at a rate in excess of the rate that the unemployed have arisen.   LEIP only seasonally adjusts the unemployment rate (we do not calculate it), but doing so provides valuable short term insight into the changes from month to month. The unadjusted rates are currently approaching 11.5%.  However, the seasonally adjusted values are still just above 11%. 

 

The outlook for the first quarter of 2010 is likely to suggest a further weakening of the employment numbers locally.  Local employers are still reluctant to increase permanent workers, choosing instead to not hire or hire temporary workers.  The public sector locally including UNF, city government, and public schools continue to face budget concerns despite federal stimulus money and that will likely lead to diminished hiring or only maintenance of the status quo.  We are mired in a chicken or egg scenario.  Employers will not hire until there is evidence that consumers intend to increase spending that will justify business expansion.  Consumers are still wary of further layoffs and even those who can be confident of their future employment prospects are still not spending, alternatively reducing debt.  We do not need additional stimulus packages out of Washington, but rather we need some alternative influence that provides increases in consumer confidence and business optimism.  If we knew what could satisfy this role we would tell you, but we do not.

 



Leading Indicator (LEI)


The LEIP leading indicator is not entirely on the same page as the national LEI.  While the Conference Board that produces the national index suggests that their index has increased for nine consecutive months, the local index suggested weakness in September and October, so only seven out of nine months of expansion.  However, more revealing is that while the national index has increased by almost seven points since April 2009, the local index has increased by less than one point.  Historically, Jacksonville and most of Florida have withstood recessions much better than the national average due to strong development, population growth, agriculture, and tourism.  This time around, these four components are much weaker here than elsewhere.  The state has lost population, particularly real estate development is stagnant, and agricultural output has suffered from both slack demand and weather issues.   More specifically, local stocks have not boomed from the basement last March like at the national level, building permits are one-fifth of normal, and initial claims for unemployment insurance have been four times previous averages.  Locally, we are limping out of this recession.  The only positive news that was substantial in the fourth quarter was the late recovery of consumer confidence (which extended into January) and interest rate spreads.  Since the local LEI projects most effectively two to three months out, despite the increases in November and December, we are not optimistic for the early spring. 

Stock Price Index


While local stocks recovered some more during the fourth quarter of 2009 along with the continued rally in the DOW, December was another bad month for local presence stocks. The local headquarters stocks are still about 1,800 below the DOW, while the local presence stocks are now 4,000 below the DOW.  For the last three quarters we implied that local stocks seem to have been hit harder than the DOW companies due to the substantial presence of financial companies in Jacksonville, and the fourth quarter numbers reveal that we continue to be correct.  Construction and real estate declines continue to contribute significantly to the weakness.  There is currently no evidence to suggest that the local stocks are going to gain substantially relative to their national counterparts. 

The Bottom Line, Locally


Overall, 2009.4 was the seventh consecutive weak quarter for Jacksonville and the nation in regards to the data LEIP collects or has access to in a consistent format.  Retail sales continued to fall, unemployment rose to values well above national values and nearly triple what they were in 2006, and inflation, while ticking up slightly, continues to be indicative of sustained weakness.  The LEI was somewhat higher in the fourth quarter, but by very marginal amounts.  The outlook for Jacksonville continues to be weak for the first portion of 2010. 

 

The media have concluded at the national level that the recession is over based on the third and fourth quarter GDP numbers.  The NBER, the group responsible for actually signaling the beginning and end of recessions, has legitimately continued to remain silent.  As we indicated last month, both Florida and Jacksonville need to develop new strategies to promote growth because the old stimuli are unlikely to return for a long time, if at all.